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GM and Chrysler may be forced into bankruptcyUPDATE #2 Days after General Motors Corp. outlined three possible bankruptcy scenarios, the U.S. Treasury Department acknowledged Monday that it is exploring how it might fund a court-protected bankruptcy by GM and Chrysler LLC. An Obama administration official indicated Monday that the efforts do not reflect any decisions about the auto industry's future.
In its viability plan filed last week, GM said a traditional Chapter 11 reorganization bankruptcy could cost more than $100 billion -- hurting sales as consumers reject GM products and causing turbulence during a process that could take years. But the automaker, which has resisted bankruptcy and emphasized its risks, also said that other bankruptcy scenarios could cost half that much. For example, a prepackaged bankruptcy, in which GM and its stakeholders would come to terms prior to the filing, could cost an estimated $45 billion. Under that scenario, GM estimates the impact on revenue would be "quite severe near-term." However, the long-term consequences would be "less severe" than a full-blown Chapter 11.
Some outside experts have argued that a court-supervised bankruptcy would allow GM and Chrysler to more easily overhaul their debt and contracts.
But GM has resisted the idea, citing all the damage such a move could cause to its sales and image. "Our primary efforts continue to be on transforming our business and executing GM's viability plan outside of bankruptcy court," GM CEO Rick Wagoner said last week. More at Detroit Free Press
02/15/09 General Motors Corp, nearing a Tuesday deadline to present a viability plan to the U.S. government, is considering as one option a Chapter 11 bankruptcy filing that would create a new company, the Wall Street Journal said in its Saturday edition.
"One plan includes a Chapter 11 filing that would assemble all of GM's viable assets, including some U.S. brands and international operations, into a new company," the newspaper said. "The undesirable assets would be liquidated or sold under protection of a bankruptcy court. Contracts with bondholders, unions, dealers and suppliers would also be reworked."
Citing "people familiar with the matter," the story said that GM could also ask for additional government funds to stave off a bankruptcy filing. GM declined to comment, the story said.
02/09/09 GM and Chrysler's days in NASCAR may be numbered. General Motors Corp. and Chrysler LLC may have to be forced into bankruptcy by the U.S. government to assure repayment of $17.4 billion in federal bailout loans, a course of action the automakers claim would destroy them.
U.S. taxpayers currently take a backseat to prior creditors, including Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to loan agreements posted on the U.S. Treasury’s Web site. The government has hired a law firm to help establish its place at the front of the line for repayment, two people involved in the work said last week.
If federal officials fail to get a consensual agreement to change their position regarding repayment, they have the option to force the companies into bankruptcy as a condition of more bailout aid. The government would finance the bankruptcy with a so-called “debtor in possession” or DIP loan, a lender status that gives the U.S. priority over other creditors, said Don Workman, a partner at Baker & Hostetler LLP.
“They are negotiating to see if they can reach an agreement,” said Workman, a bankruptcy lawyer based in Washington. “If not, they are saying ‘We are pretty darn sure that a bankruptcy judge will allow us’” to be first in line for repayment. But what about the money they are wasting in NASCAR, which does nothing for them as their sales plummet despite their NASCAR involvement? Will the bankruptcy judge order them to stop such waste immediately?
Chrysler has $7 billion in loans from a group of banks, including New York-based JPMorgan, Goldman Sachs and Citigroup. It also has $2 billion in loans from owners Cerberus Capital Management LP and Daimler AG. Cerberus owns 80.1 percent of Chrysler. Daimler owns the remainder.
GM has $6 billion in loans secured by assets from lenders including JPMorgan and Citigroup. JPMorgan spokesman Brian Marchiony, Goldman Sachs spokesman Michael Duvally and Citigroup spokeswoman Danielle Romero-Apsilos declined to comment.
Lori McTavish, a spokeswoman for Chrysler, declined to comment beyond confirming the primacy of the bank loans. GM spokeswoman Renee Rashid-Merem and Treasury spokesman Isaac Baker declined to comment.
Unless the automakers show by March 31 that they will be able to return to profit and repay the money, the government can demand return of the loans.
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